Goods and Services Tax

K mutualism INSTITUTE OF MANAGEMENT STUDIES Goods & Services levy Report submitted to Dr. Dhir residualra Deshpande in partial fulfillment for the degree of master in Business Administration Symbiosis internationalist University, Pune Abstract This report is an feat to down the stairs(a)stand the contact of GST on Indian scrimping. The report defines sales revenue and Value-Added value ( vat). It then looks at the Goods and Services valuate (GST) design in India which has been adapted to suit the Indian task revenue governance.The report ends with the prob able impact of GST on Indian economy and the limitations of the implementation of GST. ? Contents Introduction3 Sales task3 Types of assessation gross revenue appraise3 Sales evaluate in India4 Value- Added Tax ( value-added valuate)6 Importance of VAT in India6 Advantages Of VAT6 Disadvantages of VAT7 Items covered under VAT7 Tax implication under Value Added Tax human action8 VAT vs. Sales Tax8 Goods and Se rvices Tax (GST)10 Introduction10 The Need for GST10 Benefits of GST11 How GST Will Work12 GST vs. VAT14 GST vs. SALES TAX15 Limitation of GST16 IntroductionThis report is an attempt to understand the impact of GST on Indian economy. The report starts by defining Sales Tax and Value-Added Tax (VAT). It then looks at the Goods and Services Tax (GST) design in India which has been adapted to suit the Indian valuateationation system. The report ends with the probable impact of GST on Indian economy. Sales Tax A cut-rate gross revenue measure is a tax give to a governing body by a seller for the gross gross sales of certain goods and work. Laws let the seller to collect funds for the tax from the consumer at the point of purchase.Laws whitethorn allow sellers to itemiz ( evidence item by item) the tax sepa consecrately from the expenditure of the goods or work, or require it to be include in the toll (tax-inclusive). The tax amount is usually calculated by applying a percen tage rate to the taxable price of a sale. When a tax on goods or go is salaried to a governing body directly by a consumer, it is usually called a employment tax. Often laws render for the exemption of certain goods or function from sales and use tax. Types of sales tax Gross value taxes This tax has been criticized for its cascading or pyramiding effect, in which an item is taxed more(prenominal) than once as it perk ups its way from pay mop up to final retail sale. Excise taxes Applied to a narrow range of products, such as gasolene or alcohol, usually compel on the producer or wholesaler rather than the retail seller. pulmonary tuberculosis tax Imposed directly on the consumer of goods purchased without sales tax, generally items purchased from a vendor who is not under the jurisdiction of the taxing authority (e. g. , a vendor in anformer(a) state).Use taxes ar comm exactly imposed by states with a sales tax, unless argon usually only enforced for large items su ch as automobiles and boats. Securities turnover excise tax on the trade of securities. Value added taxes In which tax is charged on all sales, thus avoiding the need for a system of resale certificates. Tax cascading is avoided by applying the tax only to the difference (value added) amongst the price compensable by the first purchaser and the price paid by apiece ensuant purchaser of the same item. Fair Tax A proposed federal sales tax, intended to replace the U. S. ederal income tax. Turnover tax Similar to a sales tax, but employ to liaise and possibly capital goods as an verifying tax. Sales tax in India Central Sales tax is generally due on the sale of all goods by a dealer in the vogue of inter-state Trade or commerce or, impertinent a State or, in the business line of import into or, merchandise from India. match to S3, a sale or purchase shall be deemed to take place in the course of interstate trade or commerce in the following skids 1. When the sale or purc hase do the faecal matter of goods from matchless State to another 2.When the sale is affected by a transfer of documents of rubric to the goods during their movement from one State to another. Where the goods argon delivered to a carrier or other bailee for transmission, the movement of the goods for the end of clause (b) above, is deemed to start at the cadence of such deliverance and terminate at the time when delivery is taken from such carrier or bailee. Also, when the movement of goods starts and terminates in the same State, it shall not be deemed to be a movement of goods from one State to another.To make a sale as one in the course of interstate trade, on that point must be an obligation to transport the goods outside the state. The obligation may be of the seller or the buyer. It may arise by reason of statute or make out amongst the parties or from mutual understanding or agreement between them or, even from the nature of the transaction, which tie in the sale to such transaction. There must be a contract between the seller and the buyer. According to the terms of the contract, the goods must be moved from one state to another.If on that point is no contract, then there is no inter-state sale. There underside be an interstate sale even if the buyer and the seller go away to the same state even if the goods move from one state to another as a consequence of a contract of sale or, the goods atomic number 18 sold date they be in transit by transfer of documents. Sales tax is collectable to the sales tax authority in the state from which the movement of goods commences. It is to be paid by every dealer on the sale of any goods effected by him in the course of inter-state trade or ommerce, notwithstanding that no liability to tax on the sale of goods arises under the tax laws of the appropriate state. No state usher out levy sales tax on any sale or purchase where such sale or purchase takes place outside the state and in the course of import of goods into or export of goods outside India. Only the parliament put forward levy tax on inter-state sale or purchase of goods Not all despatches of goods from one state to another payoff in inter state sales rather the movement must be on account of a covenant or incident of the contract of sales.There are some instances wherein the goods are moved out of the selling state and yet they are not considered inter state sales - 1. Intra-state sales 2. Stock transfer from head murderice to branch & vice versa 3. Import and Export sales or purchases 4. Sale through commission agent / on account sales 5. Delivery of Goods for instruction execution works contract Exceptions in the sales tax include 1. Sales to resellers such as wholesalers and retail merchants that energize a valid state resale certificate. 2.Sales to tax-exempt institutions such as schools or charities Value- Added Tax (VAT) VAT is a multi point levy where the tax paid on local purchases from the bear witnessed dealer can be qualify off over against the tax payable on the sale of goods, other than special goods. Example Consider the make and sale of any item, which in this case we will call a widget. In what follows, the term gross margin is used rather than profit. Profit is only what is left after(prenominal) paid other costs, such as rent and somebodynel. Importance of VAT in IndiaIndia, particularly being a handicraft community, has always believed in accepting and adopting loopholes in any system administered by State or Centre. If a well-administered system comes in, it only closes options for traders and businessmen to evade paying their taxes, but also makes sure that they are compelled to for stock proper records of sales and purchases. Under the VAT system, no exemptions are given and a tax is levied at every introduce of manufacture of a product. At every stage of value- admittance, the tax that is levied on the remarks can be engageed back from tax authoriti es.At a macro level, two issues make the opening of VAT searing for India. 1. Industry watchers believe that the VAT system, if enforced properly, will form part of the fiscal consolidation system for the country. It could, in fact, help address issues like fiscal deficit problem. Also the revenues estimated to be collected can in reality mean lowering of fiscal deficit burden for the government. International Monetary Fund (IMF), in the semi-annual World Economic Outlook expressed its concern for Indias large fiscal deficit at 6 per cent of GDP. 2.Moreover any globally accepted tax administrative system would only help India comprise better in the World Trade Organization political science Advantages Of VAT 1. Simplification Under the CST Act, there are 8 types of tax rates- 1%, 2%, 4%, 8%, 10%, 12%, 20% and 25%. However, under the present VAT system, there are only 2 types of taxes 4% on declared goods and 10-12% on RNR. This will eliminate any disputes that relate to rates of tax and classification of goods as this is the close usual cause of litigation. It also helps to determine the relevant stage of the tax.This is necessary as the CST Act stipulates that the tax levies at the first stage or the become stage differ. Consequently, the question of which stage of tax it falls under becomes another reason for litigation. Under the VAT system, tax is levied at each stage of the goods of sale or purchase. 2. Transparency The tax that is levied at the first stage on the goods or sale or purchase is not transparent. This is because the amount of tax, which the goods have suffered, is not known at the subsequent stage. In the VAT system, the amount of tax is known at each and every stage of goods of sale or purchase. . Fair and Equitable VAT introduces the uniform tax rates crosswise the state so that unjust advantages cannot be taken while levying the tax. 4. Procedure of simplification Procedures, relating to filing of returns, payment of tax, furn ishing declaration and assessment are simplified under the VAT system so as to minimize any interface between the tax payer and the tax collector. 5. Minimize the Discretion The VAT system proposes to minimize the discretion with the assessing military officer so that every person is treated alike.For subject, there would be no discretion involved in the imposition of penalty, late filing of returns, non-filing of returns, late payment of tax or non-payment of tax or in case of tax evasion. Such system would be free from all these harassment 6. Computerization The VAT proposes computerization which would focus on the tax evaders by generating Exception Report. In a large occur of cases, no processing or scrutiny of returns would be required as it would free the tax willing dealers from all the harassment which is so much a part of assessment.The management information system, which would form a part of integral computerization, would make the tax department more efficient and responsive. Disadvantages of VAT 1. VAT is regressive 2. VAT is onerous to operate from position of both court and business 3. VAT is inflationary 4. VAT favors capital intensive firms Items covered under VAT 1. All business transactions that are carried on within a State by individuals/partnerships/ companies etc. are covered under VAT. 2. More than 550 items are covered under the new Indian VAT regime out of which 46 natural rough local products will be exempt from VAT 3.Nearly 270 items including drugs and medicines, all industrial and agricultural arousals, capital goods as well as declared goods attract 4 % VAT in India. 4. The remaining items attract 12. 5 % VAT. Precious metals such as gold and bullion will be taxed at 1%. 5. flatulency and diesel are kept out of the VAT regime in India. Tax implication under Value Added Tax Act SellerBuyerSelling Price (Excluding Tax)Tax RateInvoice value (InclTax)Tax PayableTax acknowledgementNet TaxOutflow AB1004% CST104404. 00 BC11 412. 5% VAT128. 2514. 250*14. 25 CD12412. 5% VAT139. 5015. 5014. 251. 25 DConsumer13412. % VAT150. 7516. 7515. 501. 25 Total to Govt. VAT CST16. 75 4. 00 VAT vs. Sales Tax VAT is a form of indirect tax which is imposed on products or services at different stages of manufacturing, where as Sales Tax is levied at the time of the purchase of the products or services. VAT is levied on both the producer and consumer while a sales tax is levied on only the end consumer. VAT involves tricky accounting while sales tax involves simpler accounting. VAT is applied at the heterogeneous stages of production while sales tax is applied on the total value of the purchase. VAT efficiently avoids evasion of taxes while a sales tax is unable to deal with this. In VAT the method adopted is Input Tax Credit while Sales tax, liability of a dealer for a particular compass point is determined using the times method. Goods and Services Tax (GST) Introduction Goods and Service Tax is a tax on goods and se rvices, which is leviable at each point of sale or provision of service, in which at the time of sale of goods or providing the services the seller or service provider can outcry the stimulant drug credit of tax which he has paid while purchasing the goods or procuring the service. GST is the rate of tax remains the same but as per the necessity of the nation some goods or services can be declared as exempted or Zero rated. A system Exports are zero rated and all the taxes paid while purchasing and manufacturing the goods including the taxes paid on raw material and services are returned to the exporter to make the exports competitive. The sellers or service providers collect the tax from their customer, who may or may not be the ultimate customer, and in the beginning depositing the same to the exchequer, they deduct the tax they have already paid.The Need for GST Avoid cascading effect of taxation A main reason of the introduction of GST is to avoid cascading effect of taxes in India. For example manufacturing of a product attract CENVAT (Central Value Added Tax) is a fixings of the tax structure employed by many an(prenominal) countries in the western section of Europe. CENVAT is derived from a tax system that is generally referred to as VAT. The manufacturer pays CENVAT on goods produced. According VAT rules, the sales tax is payable on the compound selling price which include CENVAT. Here there is no set off benefits available. Shortfall of Existing VAT Indirect taxes like luxury tax, entertainment tax, are yet to be include in the VAT. These taxes are still existing and payable. Shortfall of Existing CENVAT Several taxes like supererogatory customs duty, surcharges not included under CENVAT. Input tax and service tax set off is out of reach to the manufacturer and dealers. Benefits of GST GST provide comprehensive and wider coverage of input credit setoff, you can use service tax credit for the payment of tax on sales of goods. CST will be removed (p) and need not pay.At present there is no input tax credit available for CST. many a(prenominal) indirect taxes in state and central level submit by GST, you need to pay maven GST instead of all. Uniformity of tax rates across the states. Ensure better compliance due to aggregate tax rate reduces. By reducing the tax burden the competitiveness of Indian products in outside(a) market is expected to amplify and there by development of the nation. Price of goods is expected to be cut in the long run as the benefit of less tax burden would be passed on to the customer. Overall tax compliance cost will reduce for government and can concentrate on GST. How GST Will Work The dealers registered under GST (Manufacturers, Wholesalers and retailers and service providers) charge GST on the price of goods and services from their customers and claim ascribe for the GST included in the price of their own purchases of goods and services used by them. While GST is paid at each step in the su pply chain of goods and services, the paying dealers dont actually bear the burden of the tax because GST is an indirect tax and ultimate burden of the GST has to be taken by the last customer.This is because they include GST in the price of the goods and services they sell and can claim credits for the or so GST included in the price of goods and services they buy. The cost of GST is borne by the final consumer, who cant claim GST credits, i. e. input credit of the tax paid. How GST Will Work The dealers registered under GST (Manufacturers, Wholesalers and retailers and service providers) charge GST on the price of goods and services from their customers and claim credits for the GST included in the price of their own purchases of goods and services used by them.While GST is paid at each step in the supply chain of goods and services, the paying dealers dont actually bear the burden of the tax because GST is an indirect tax and ultimate burden of the GST has to be taken by the las t customer. This is because they include GST in the price of the goods and services they sell and can claim credits for the more or less GST included in the price of goods and services they buy. The cost of GST is borne by the final consumer, who cant claim GST credits, i. e. input credit of the tax paid. WorkingThe illustration shown below indicates, in terms of a hypothetical example with a manufacturer, one wholesaler and one retailer, how GST will work. Let us suppose that GST rate is 10%, with the manufacturer making value extension of Rs. 30 on his purchases worth Rs. 100 of input of goods and services used in the manufacturing process. The manufacturer will then pay net GST of Rs. 3 after setting-off Rs. 10 as GST paid on his inputs (i. e. Input Tax Credit) from gross GST of Rs. 13. The manufacturer sells the goods to the wholesaler. When the wholesaler sells the same goods after making value addition of (say), Rs. 0, he pays net GST of only Rs. 2, after setting-off of Inpu t Tax Credit of Rs. 13 from the gross GST of Rs. 15 to the manufacturer. Similarly, when a retailer sells the same goods after a value addition of (say) Rs. 10, he pays net GST of only Re. 1, after setting-off Rs. 15 from his gross GST of Rs. 16 paid to wholesaler. Thus, the manufacturer, wholesaler and retailer have to pay only Rs. 6 (= Rs. 3+Rs. 2+Re. 1) as GST on the value addition along the entire value chain from the producer to the retailer, after setting-off GST paid at the earlier stages.The boilersuit burden of GST on the goods is thus much less. This is shown in the table below. The same illustration will appropriate in the case of final service provider as well. Stage of supply chain buy value of Input Value addition Value at which supply of goods and services made to adjacent stage Rate of GST GST on siding Input Tax credit Net GST= GST on product + Input tax credit Manufacturer 100 30 130 10% 13 10 13-10 = 3 Wholesaler 130 20 150 10% 15 13 15-13 = 2 retail merchan t 150 10 160 10% 16 15 16-15 = 1 The GST can be separate into following sections to understand it better 1.Charging Tax The dealers registered under GST (Manufacturers, Wholesalers and Retailers and Service Providers) are required to charge GST at the specified rate of tax on goods and services that they supply to customers. The GST payable is included in the price paid by the pass catcher of the goods and services. The supplier must deposit this amount of GST with the Government. 2. Getting Credit of GST If the recipient of goods or services is a registered dealer (Manufacturers, Wholesalers and Retailers and Service Providers), he will normally be able to claim a credit for the amount of GST he has paid, provided he holds a proper tax billhook.This input tax credit is set off against any GST (Out Put), which the dealer charges on goods and services, which he supplies, to his customers. 3. Ultimate consequence of Tax on Last Customer The net effect is that dealers charge GST bu t do not keep it, and pay GST but get a credit for it. This means that they act essentially as collecting agents for the Government. The ultimate burden of the tax falls on the last and final consumer of the goods and services, as this person gets no credit for the GST paid by him to his sellers or service providers. 4. Registration Dealers will have to register for GST.These dealers will include the Suppliers, Manufacturers, Service Providers, Wholesalers and Retailers. If a dealer is not Registered, he normally cannot charge GST and cannot claim credit for the GST he pays and further cannot issue a tax invoice. 5. Tax Period The tax period will have to be decided by the respective law and normally it is monthly and (or) quarterly. On a particular tax period, this is applicable to the dealer concerned the dealer has to deposit the tax if his output credit is more. Than the input credit after considering the opening balance, if any, of the input credit. . Refunds If for a tax period the input credit of a dealer is more than the output credit then he is eligible for reelect subject to the provisions of law applicable in this respect. The excess may be carried forward to near period or may be refunded immediately depending upon the provision of law. 7. Exempted Goods and Services Certain goods and services may be declared as exempted goods and services and in that case the input credit cannot be claimed on the GST paid for purchasing the raw material in this respect or GST paid on services used for providing such goods and services. 8.Zero Rated Goods and Services Generally, export of goods and services are zero-rated and in that case the GST paid by the exporters of these goods and services is refunded. This is the basic difference between Zero rated goods and services and exempted goods and services. 9. Tax Invoice Tax invoice is the basic and grand document in the GST and a dealer registered under GST can issue a tax invoice and on the basis of this invoic e the credit (Input) can be claimed. Normally a tax invoice must bear the name of supplying dealer, his tax identification nos. , address and tax invoice nos. oupled with the name and address of the purchasing dealer, his tax identification nos. , address and description of goods sold or service provided. Impact of GST on Economy International Experiences Most countries have adopted VAT system and GST is considered similar to a VAT system. It is possible that some economies that have adopted VAT system are actually a GST as well. So we really do not know the broad experiences of most economies and stick to countries which call their tax systems as GST based. GST system has been adopted in a few economies Canada, Australia, untested Zealand and Singapore.Hong Kong proposed to introduce it but had to abandon it amidst stiff opposition. Over a long term there are improvements across the macroeconomic variables but there were short-term glitches. Inflation did seem to rise in the ag e of introduction but was mainly blamed on the administration for the same. The impact on revenue and reliable account has been very impressive with sharp gains seen in all the three economies. In Australia there was a more dramatic impact of GST on the economy. Before GSTs implementation, consumers rushed to purchase goods that they perceived would be substantially more expensive post-GST.After the tax, consumer expenditure and economic growth declined sharply initially. In Q1 2000, Australian economy recorded negative economic growth for the first time in more than 10 years. function and growth soon returned to normal. There was some negative impact on price of real land as well but the market rose and property prices and demand increased sharply in 2002-04. GST increased the real output of the Canadian economy by 1. 4% of GDP, principally through an increase in the productivity of capital and total factor productivity. The sectors like transportation, utilities, services and agriculture experienced noteworthy gains.Following are the impacts of GST on Australia, New Zealand and Canada AUSTRALIANEW ZEALANDCANADA Price ChangesShort run one off effectShort run spike in prices, no protracted run increaseShort run spike in prices, no longer run increase, price regulatory body Criticize Economic GrowthIntroduced during sustained economic growth periodIntroduced at the end of recession, subsequent upswingIntroduced in midst of major recession, criticized as Compounding problems Revenue GrowthRevenue exceeded expectationsRevenue exceeded ExpectationsRevenue exceeded Expectations Current AccountSlight improvement ince introductionRapid immediate improvement, longer term stabilizationDramatic Improvement since introduction of GST, NAFTA GST vs. VAT Limitations in Centre VAT system There is CENVAT but several taxes are still out of the ambit like surcharges, additional customs duties etc. In some goods we get input tax and not in others, making the tax filing sy stem complex and cumbersome. Limitations in State VAT system The States also have VAT but again story is the same. Many taxes like luxury taxes, entertainment tax etc, are not included. There is no input tax credit in case of CENVAT paid on certain items. Interstate Sales Tax (CST) Though it is an important source of revenue for states it is seen as very burdensome by businesses. The companies make goods in one state but on distribution inside the country, end up paying taxes in each state. They are supplying goods within the country and should just be taxed at one place. Inclusion of Services in VAT system Production of goods is because of both physical production and services. entirely Services are taxed only by Centre and that too is done selectively. The Services need to be taxed at State level and integrated with the Goods VAT system as shown in the example above. International Standard GST is becoming an international standard and it is important India also has one. There are many factors before international companies while choosing a country for its business and taxation system is one very important factor. With other countries having GST and India not having one, the companies are likely to opt for former ahead of India for locating their businesses. Likewise Indian companies may also prefer to increasingly set their bases in other countries where tax system is more efficient. GST vs. Sales Tax Single versus multiple stageUnlike the existing sales tax, GST is generally charged on the consumption of goods and services at every stage of the supply chain, with the tax burden ultimately borne by the end consumer. This multiple tax levels feature of GST is the fundamental change from the present single-stage sales tax levied at only one stage of the supply chain. Goods and services subject to tax GST operates on a negative fancy all goods and services are subject to GST unless specifically exempted. For sales tax, the same concept applies where all good s are taxable unless specifically exempted.It is anticipated that the number of exemptions under the present sales tax regime would be significantly reduced. Tax payment and accounting periods Time of supply is an important feature under the GST regime (method or system of government) as it determines when one should account for GST in the GST returns. The approach used by many countries when adopting GST is that a supply is considered to have taken place at the earliest by three events that the time is invoice issue, the time any payment is received by the supplier and the time a taxable supply is made.The GST rules differ from the existing sales tax structure where sales tax becomes due and payable when there is a sale or disposal otherwise than by sale. radical registration Group registration is included as a facility that allows companies to file amalgamate GST returns. The objective is to reduce their GST administration costs where supplies made within a group would be disrega rded for GST purposes. The facility could potentially result in better cash flow management for the group if goods and services are regularly supplied between group companies.The existing sales tax and service tax structures do not allow consolidated tax filings. Limitation of GST There are two main limitations of GST Inflation Most of the international case studies show an inflation fashion in initial months of GST implementation. In Australias case we saw spurt in prices of goods which Australian consumers Thought would become expensive after the GST. Much of blame for inflation is accorded to the various regulatory bodies and uncertainty over the new tax regime.The inflation situation stabilizes as implementation gains footstep and is understood by consumers and producers. In Indias case inflation could be critical as contrary developed countries profiled above, India has far more inefficiencies in supply chain in local markets. The Indian GST repossess is far larger in scale compared to above economies. Indian economy is already plagued with persistent high up inflation and this new reform could further test inflation further. Tax Revenue Shortfall rbi in the State Finances Report (2010-11) said the revenue implications of GST are likely to vary across states.The Centre and the States are still discussing various aspects of GST like taxation rates, revenue sharing model between Centre and States etc. As there is still uncertainty over the final blueprint of GST, it is difficult to estimate the impact of GST on state finances. Other issues are enhancing the administrative capacity of states and building IT (Information technology) radical to capture the full benefits of GST. The report points that VAT led to improvement in tax revenue for most states.